Edited version of private ruling

Authorisation Number: 1011865846590

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Ruling

Subject: Legal expenses

Question

Are you entitled to a deduction for legal expenses?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You are an employee.

Your employment is conducted on terms that standards of professional conduct must be observed and non compliance may mean dismissal.

It is a requirement that you be registered with the relevant authority and charges of misconduct may bar you from renewing your registration.

Allegations of sexual assault were brought against you for an incident outside of your employment.

You incurred legal expenses to defend the charge.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for a loss or outgoing to the extent to which it is incurred in gaining or producing assessable income, except where the loss or outgoing is of a capital, private or domestic nature, or relates to the earning of exempt income.

In determining whether a deduction for legal expenses is allowable under section 8-1 of the ITAA 1997, the nature of the expenditure must be considered.

The nature or character of legal expenses follows the advantage that is sought to be gained by incurring the expenses (Hallstroms Pty Ltd v. FC of T (1946) 72 CLR 634; (1946) 8 ATD 190). If the advantage to be gained is of a capital nature, then the expenses incurred in gaining the advantage will also be of a capital nature.

Legal expenses are generally deductible if the expenses arise out of the day to day activities of a taxpayer's employment duties. For example, in FC of T v. Rowe (1995) 60 FCR 99; (1995) 31 ATR 392; 95 ATC 4691 (Rowe's case), the court accepted that legal expenses incurred in defending the manner in which a taxpayer performed his employment duties were allowable.

Conversely, in Case W94 89 ATC 792; AAT Case 5376 (1989) 20 ATR 4001(Case W94) the taxpayer, a public servant incurred legal fees in defending and then appealing against disciplinary charges of improper conduct resulting from his compulsive gambling. It was found that the expenses incurred where not incidental or relevant to the gaining of the taxpayer's assessable income. It was the conduct of the taxpayer through his compulsive gambling which led to the charges which, in turn, led to him incurring legal costs. The expenses incurred were not incidental or relevant to the gaining of the taxpayer's assessable income.

Allegations of sexual assault were made against you from an incident that occurred outside the work place.

While we accept that you may have lost your job if the allegations were proven, this does not change the nature of the expense. As in Case W94, expenses relating to the allegation of sexual assault are not deductible as they relate to your personal conduct and not your employment duties.